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CAPM comes from Markowitz' portfolio theory. We study agents utility maximization behavior, and get results like two-fund separation. Every agent holds the tangency portfolio, combined with the risk-free asset.

So is it all as simple as saying "every agent holds tangency portfolio -> therefore it is the market portfolio in equilibrium?"

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  • $\begingroup$ What do you mean with "tangency portfolio"? Please clarify. $\endgroup$
    – Bernd
    Jun 17, 2018 at 14:56
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    $\begingroup$ I'm not sure I understand what's your specific question? Do you want to know how economists use the word "equilibrium?" How to deduce the Sharpe-Lintner CAPM from more primitive assumptions? Something else? $\endgroup$
    – Matthew Gunn
    Jun 17, 2018 at 21:38

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Your question is very interesting. Your statement is:

"every agent holds tangency portfolio -> therefore it is the market portfolio in equilibrium?"

more precisely we can says, as first part of the statement, that the tangency ptf is the only purely risky ptf that any agent holds.

So, the first part of the statement is more general that the second and do not imply it. Basically we can say that the first part imply the second only if homogeneous expectations assumption hold. Starting by MV assumptions the above is the most relevant CAPM assumption.

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